The times, they are a changin’:
Primary dealers, the select group of banks and brokers that have held a seat at the center of the U.S. government debt market since 1960, are losing influence.
More than 20 percent of the $538 billion of Treasury notes auctioned this year have been awarded to bidders who bypassed the dealers by using a website to place their orders, according to U.S. Treasury Department data compiled by Bloomberg. That’s almost double the 2011 level and up from 5.6 percent in 2009.
In the same way technology eroded the middleman role once played by travel agents and stock-market specialists, increased use of the direct-bidding system threatens government-bond traders at firms ranging from Bank of America Corp. to UBS AG. (UBSN). It also has eaten into profits from a business that’s among the least affected by the regulatory changes and new capital requirements reshaping the industry.
…
Traders at primary dealers have complained to the Treasury and the Federal Reserve Bank of New York about direct bidding, which they say is reducing their profitability, according to seven government-bond traders who requested anonymity because they weren’t authorized to comment publicly. Their job is becoming more frustrating, and sometimes money-losing, now that they’re competing in auctions against anonymous investors who can show up at any time and at any price, the traders said.
I’m sure we’ll all shed a tear for the poor traders who are finding that being the guy who answers a particular telephone isn’t as good a job as it used to be.
Here in Canada, the bond business is pretty good:
Royal Bank of Canada (RY), the top underwriter of Canadian corporate bonds for the past decade, is predicting record issuance this year led by a surge in high- yield debt.
Bond sales in Canadian dollars will reach C$95 billion ($94 billion) this year, on pace to shatter 2006’s record C$93 billion, said Altaf Nanji, senior credit-research analyst at RBC Capital Markets in Toronto. Issuance in the first quarter, typically the busiest of the year, was C$30 billion, according to RBC data. The firm’s forecast in December was for C$92 billion, including about C$5 billion of junk sales.
“The revised forecast puts issuance on pace to surpass our 2006 record year, based on the health of the high-yield sector, an increase in mortgage securitization and a more-active-than- expected first quarter for Maple issuance,” Nanji said in a phone interview.
Investors are snapping up the riskiest debt to meet annual return targets as central banks hold down borrowing costs to stave off recession. Sun Life Financial Inc. (SLF) altered its investment mandate to add high-yield bonds to the C$115 billion of assets it oversees to offset falling interest rates.
Issuance of high-yield bonds climbed 32 percent to C$1.14 billion in the first quarter, compared with an increase of 11 percent to $109 billion in the U.S. speculative market, according to data compiled by Bloomberg. RBC expects the junk market to grow to C$35 billion of bonds outstanding by 2016, up from C$11 billion currently.
The Bank of Canada has released a paper by Carlos de Resende, Ali Dib, René Lalonde and Nikita Perevalov titled Countercyclical Bank Capital Requirement and Optimized Monetary Policy Rules:
Using BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks. Moreover, the bank capital regulatory policy and monetary policy interact, and this interaction is contingent on the type of shocks that drive the economic cycle.
Finally, we analyze loss functions based on macroeconomic and financial variables to arrive at an optimal countercyclical regulatory policy in a class of simple implementable Taylor-type rules. Compared to bank capital regulatory policy, monetary policy is able to stabilize the economy more efficiently after real shocks. On the other hand, financial shocks require the regulator to be more aggressive in loosening/tightening capital requirements for banks, even as monetary policy works to counter the deviations of inflation from the target.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 14bp, FixedResets down 14bp and DeemedRetractibles off 4bp. Volatility was muted. Volume was very low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0636 % | 2,601.7 |
| FixedFloater | 4.08 % | 3.44 % | 30,762 | 18.37 | 1 | 0.4752 % | 3,982.0 |
| Floater | 2.67 % | 2.90 % | 79,346 | 20.02 | 4 | -0.0636 % | 2,809.1 |
| OpRet | 4.80 % | -0.18 % | 51,403 | 0.20 | 5 | 0.0232 % | 2,611.6 |
| SplitShare | 4.81 % | 3.99 % | 135,402 | 4.15 | 5 | -0.0394 % | 2,952.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0232 % | 2,388.1 |
| Perpetual-Premium | 5.19 % | 1.87 % | 88,707 | 0.63 | 32 | 0.1358 % | 2,378.2 |
| Perpetual-Discount | 4.86 % | 4.85 % | 168,980 | 15.71 | 4 | 0.0815 % | 2,676.9 |
| FixedReset | 4.90 % | 2.55 % | 286,000 | 3.24 | 80 | -0.1413 % | 2,516.5 |
| Deemed-Retractible | 4.86 % | 2.93 % | 129,856 | 0.55 | 44 | -0.0369 % | 2,456.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.C | FixedReset | -1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 2.30 % |
| CU.PR.C | FixedReset | -1.11 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 26.66 Bid-YTW : 2.43 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| PWF.PR.R | Perpetual-Premium | 123,000 | Nesbitt crossed 120,000 at 26.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-30 Maturity Price : 25.50 Evaluated at bid price : 26.74 Bid-YTW : 4.43 % |
| BNS.PR.P | FixedReset | 112,293 | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.18 Bid-YTW : -2.90 % |
| FTS.PR.J | Perpetual-Premium | 82,650 | Desjardins crossed blocks of 10,000 and 36,000 at 25.90, then bought blocks of 10,500 and 10,000 from RBC at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.86 Bid-YTW : 4.36 % |
| TD.PR.Y | FixedReset | 33,587 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 2.99 % |
| GWO.PR.M | Deemed-Retractible | 32,725 | National crossed 25,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-31 Maturity Price : 26.00 Evaluated at bid price : 26.66 Bid-YTW : 4.30 % |
| HSB.PR.C | Deemed-Retractible | 29,450 | TD crossed 25,000 at 25.52. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-30 Maturity Price : 25.25 Evaluated at bid price : 25.43 Bid-YTW : 2.33 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.G | FixedReset | Quote: 25.11 – 25.37 Spot Rate : 0.2600 Average : 0.1629 YTW SCENARIO |
| MFC.PR.C | Deemed-Retractible | Quote: 24.86 – 25.10 Spot Rate : 0.2400 Average : 0.1455 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 25.30 – 25.50 Spot Rate : 0.2000 Average : 0.1316 YTW SCENARIO |
| PWF.PR.M | FixedReset | Quote: 25.78 – 25.99 Spot Rate : 0.2100 Average : 0.1447 YTW SCENARIO |
| GWO.PR.L | Deemed-Retractible | Quote: 26.33 – 26.52 Spot Rate : 0.1900 Average : 0.1249 YTW SCENARIO |
| FTS.PR.J | Perpetual-Premium | Quote: 25.86 – 26.05 Spot Rate : 0.1900 Average : 0.1295 YTW SCENARIO |